When carrying out a construction project, whether it entails building a residential home (of any size) or a commercial building, the lender almost always requires that an independent construction loan inspector monitor the project from start to finish. Many consider this an extra burden that requires not only a time commitment from the contractor but also additional costs. But an independent construction loan inspector is not necessarily a stress factor but an important resource in a project – perhaps even more so in today’s market, with major increases in building costs, uncertain housing markets and a shortage of labour.
Construction loan inspections are subject to various standards and detailing requirements. Some banks want a full breakdown of the entire project, starting with a preliminary analysis of the project’s financial feasibility, i.e. a value assessment of the finished structure, the realism of the estimates/budget presented, any risk areas underestimated or omitted by the construction client and a review of all relevant documents/contracts. Other banks are only interested in an inspection that encompasses the actual construction of the building to ensure that it corresponds to the desired loan to be disbursed.
Regardless of the extent of the bank’s involvement, the goal is the same, namely to ensure that the project is carried out as planned, so that the loan will be paid back and the bank does not run a risk. Accordingly, all parties have a common objective to carry out the project as intended. A good construction loan inspector understands this and will make every effort to help achieve this common goal.
In other words, a good construction loan inspector is a resource, not a burden. By looking at a project through new, independent eyes, the inspector can find solutions, identify challenges that can be resolved before they become a problem and more importantly, provide assurance to the construction client that the project is moving in the right direction.
The independence of the inspector is a particularly important element. Not being personally involved either financially or in terms of prestige makes it possible to analyse the project objectively and at arm’s length. This helps ensure that the right decisions are made, but it is also important that the inspector have the necessary insight and experience from these types of projects. Anyone who has been involved in building construction knows how complicated it is, let alone how many unforeseen challenges can arise. In other words, these inspectors should have personal experience with carrying out the same type of project in question, either as a construction client responsible for the entire project or as a project contractor. They need to have a good understanding of both financial and structural engineering matters, not to mention good communication skills, in order to ensure that the construction client, contractor and lender are all fully up to date on all project details and requirements. After all, the inspector serves as the liaison between three different groups/types of professionals with little idea about what the others do in their day-to-day work life. It goes without saying that good social skills are extremely important.
Strong communication skills must also be expressed in writing. Unfortunately, we all too often see inspection reports written like a letter that concludes with either a thumbs up or rejection – without explaining why. We believe that a report should offer a detailed analysis and description of the project, so that all parties involved know exactly how the conclusion was reached. This makes it easier to discuss any measures, make the right decisions and have the assurance that the project is progressing well. Don’t just trust that the inspector has everything under control.
It is also important that the construction loan inspector have the ability to make active decisions when necessary. In one case, we discovered that the contractor did not have control over the situation and was on the verge of bankruptcy. The building had reached a stage in construction where stoppage would have had significant consequences since the roof was not in place, so it was not ‘dry’. In other words, a work stop would most likely have resulted in water damage and having to tear down large sections of the structure already built. Performing an active role in the construction of the roof ensured a dry building and consequently, a prevention of value loss.
Fortunately, this example is an exception, but it demonstrates why a construction loan inspector is – and should be considered – an important resource. We believe that this role is only increasing in importance, especially in today’s challenging market. With soaring building costs, a difficult job market and uncertainty about whether a completed project will be sold, the building loan inspector has become extremely important for reasons of not only cost control, but also when it comes to alternative solutions and close monitoring. Construction projects have never been more challenging.
Contact Bjarki Reyr at Veridian Analyse AS at +47 919 02 788 for a no-obligation chat about our construction loan monitoring services and construction-related advice.
Bjarki Reyr, Veridian Analyse AS
Veridian Analyse are specialists in consulting for commercial and development real estate. Our employees have backgrounds in finance and technical construction, allowing us to assist with complete property analyses, whether this involves assessing the property in its current state as-is, assessing the property’s development potential, or assessing the property based on special premises.